WSJ & CNBC: Fed Official Calls for “Open Ended” QE

Adding to today’s continued move higher in the markets, we have additional confirmation that the Fed is on the brink of action sooner rather than later (regardless of any additional stimulus by the ECB). As per usual, the Fed used two of its classic outlets this morning to unveil the direction it may plan on taking when the world’s central bankers convene at the Fed’s annual conference in Jackson Hole, Wyo., on Aug. 31 (next FOMC meeting scheduled for Sept. 12-13).

As indicated by WSJ’ Jon Hilsenrath and Boston Fed President Eric Rosengren, the key for the Fed is the change of communication in its strategy – in other words, removing the constraints of dollar value and time with its programs. In an “open-ended” quantitative easing program, the Fed will still stick with purchasing mortgage-backed securities (and possibly U.S. Treasury securities) at a substantial monthly rate, growing the Fed’s balance sheet by whatever amount it takes to see better economic data (program is directly tied to “economic outcomes”).


Rosengren: Winded Economy Needs More Juice from Fed:

“We’re only just trending water in the labor market,” says Eric Rosengren, Boston Fed President, commenting on the outlook on employment and discussing why he thinks the Fed needs “an open-ended” policy on quantitative easing and expand its portfolio of mortgage bonds and U.S. Treasuries, with CNBC’s Steve Liesman.


Fed Official Calls for Bond Buying


Eric Rosengren, president of the Federal Reserve Bank of Boston, called on the Fed to launch an aggressive, open-ended bond buying program that the central bank would continue until economic growth picks up and unemployment starts falling again.

His call came in an interview with The Wall Street Journal, the first since the central bank signaled last week that it was leaning strongly toward taking new measures to support economic growth.

Mr. Rosengren isn’t currently among the regional Fed bank presidents with a vote on monetary policy. Although all 12 presidents participate in Fed deliberations, only five join the seven Fed governors in Washington in the formal committee vote.

Still, he is part of a wing of policy activists at the Fed who have pushed for more aggressive responses to a weak economy. His decision to speak out forcefully is a sign of the momentum building inside the Fed for a new phase of action. A bond-buying program, also known as quantitative easing, would aim to drive down long-term interest rates, drive up stocks and push down the value of the dollar, which many officials believe would spur activity.

Mr. Rosengren likened the economy to a swimmer treading water and getting nowhere. The unemployment rate has been stuck above 8% all year.

Despite a pickup in payroll employment growth in July, he said, many other measures of the job market’s vitality remain soft. The percentage of the population that is employed fell from 58.6% in June to 58.4% in July and is lower than it was at the beginning of the year, he noted.

“That calls for a more substantive action than we’ve taken to date,” he said. “We need a pro-growth monetary policy.” Treading water, he added, was “not sufficient.”

Mr. Rosengren said the Fed should buy more mortgage-backed securities and possibly U.S. Treasury securities in an open-ended program, and state that it will continue to buy bonds “until we start seeing some pretty significant improvements in growth and income.”

He argued that the Fed is missing both aspects of its congressional mandate: maximum sustainable employment and price stability. While unemployment is high, inflation, as measured by the Commerce Department’s personal consumption expenditure price index, is below the Fed’s 2% goal.

The Fed already has launched two rounds of bond buying. From 2009 through early 2010, the central bank purchased $1.25 trillion worth of mortgage-backed securities, $300 billion worth of U.S. Treasury securities and $175 billion of debt issued by Fannie Mae and Freddie Mac, the government-backed mortgage companies. In all, the program averaged purchases of about $115 billion per month.

During a second program, the Fed bought $600 billion of Treasury securities in 2010 and 2011, averaging $75 billion a month.

A new program, Mr. Rosengren said, should be “at least of the magnitude that we’ve had before.” The difference, he said, should be that a new program shouldn’t set a fixed amount or end-date.

This could be an opening shot in a high-stakes phase of bargaining taking place inside the central bank.

While Mr. Rosengren and his allies are likely to press for more action, Fed policy hawks have been arguing that the Fed shouldn’t do anything unless inflation gets much lower.

In Mr. Rosengren’s camp of activists are likely to be the Fed’s vice chairwoman, Janet Yellen, and New York Fed President William Dudley.

The key decision maker is Fed Chairman Ben Bernanke. He speaks at the Fed’s annual conference in Jackson Hole, Wyo., on Aug. 31 and could state his case for the course he wants to follow. Fed officials are next scheduled to meet Sept. 12-13.

Mr. Rosengren said he wanted to do more than launch a bond-buying program. As an additional step, he said the Fed should gradually reduce the 0.25% interest rate that it pays banks for cash they leave with it on reserve. Other short-term lending rates are lower, such as Treasury bill rates, he noted. “It seems like we’re paying too much for people to hold reserves,” he said.

The Fed has been reluctant to reduce this 0.25% rate, in part because officials worry that cutting already low rates will disrupt activity in short-term lending markets, including money-market funds. Short-term lenders could face even less income with a cut in this rate, and less ability to cover their operating expenses.

Mr. Rosengren is one of the Fed’s experts on money-market funds because the Boston area is home to many money managers. He has raised the ire of many money-fund managers for calling for more regulation of the industry. His focus on the money-fund industry makes his comments on the reserve rate noteworthy.

He said he didn’t expect a reduction in the reserve interest rate to significantly damage short-term lending markets. But because of worries he said he favored only gradual cuts and that he didn’t support setting the rate at zero, as the European Central Bank recently did.

Write to Jon Hilsenrath at

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